June 7, 2021
Good morning,
I’ll be out of the office all morning so I’ll give you an early, and a bit of a light, Morning Note this morning.
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Overnight (as of 5am ET)
Futures are off just slightly overnight. Markets run on narratives, and the dominant story at present is that the Fed will do its utmost to bring down unemployment, while being prepared to risk inflation. That narrative remains intact this morning, to judge by the lack of reaction in Asian trading to Treasury Secretary Janet Yellen’s comment at the G7 Meeting that higher interest rates would be a plus for the U.S and the Fed. Arguably, Friday’s unemployment figures undermine the case for continued emergency support for the economy. It seems fair to expect the Fed to keep the pedal pressed to the metal, though.
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Speaking of Narratives – a reprint of a part of a weekend piece by Ned Davis (himself)
History and psychological studies teach that there is such a thing as “illusory truth.” This happens when people hear something over and over so many times that they believe it to be true, whether it is or not. Politics is an area where one often sees this practice of saying something over and over. To explain this illusory truth, ask most Republicans about the election in 2020 and they (70% by polls) will tell you that the election was stolen by Biden and the Democrats. Fox News reports this regularly. Nevertheless, if one were to turn on CNN or MSNBC, over and over one would hear that this “fact” is “the big lie.” I am not here to debate politics, but the only way I can explain this incredible example of “alternative truths” is that people are often uncertain, and they listen to those they tend to agree with to feel more comfortable. We all “make our own reality.” And the more times one hears something, the more likely one is to believe it. Because I believe that we are all subject to illusory truth, I tend to also be suspicious of overly popular economic narratives. For example, the Fed tells us many times a week that inflation — if it happens — is transitory. And I tend to agree with this, but several good indicators are calling the Fed’s bluff. Watching the Tape I don’t know who is right, but I do know that because most economists, the Fed, and the stock and bond markets believe this “transitory argument,” that doesn’t mean that the narrative is not another historical illusion. If the tape turns down, I am not going to fight it. So, my reality is to keep my eye on the ball — the tape.
Be well,
Mike